20 Steps to Effective DIY Investing

You’ve got a great job. You’re making your monthly debt payments to pay down student loans and the mortgage, perhaps making additional payments on the interest. You’re living a life of relative frugality and you’re keen on achieving financial independence. Now you’re ready to start investing.

20 Steps to an Effective DIY Investment Plan

1. Read a book.

Or two or three. The internet is full of great information, but it can be difficult to know where to begin. A good basic personal finance book is organized into a cohesive package of well-written and professionally edited chapters designed to teach you what you need to know and understand to be comfortable managing your money.

The Bogleheads’ Guide to Investing by Taylor Larimore, Michael LeBouf, and Mel Lindauer takes the logic and ideologies of ‘Saint’ Bogle and applies them to everyday investing for people like you and me.

2. Harness the power of the internet.

Once you have some baseline knowledge from reading a book or two, refine that knowledge with a little browsing. Read some articles and blog posts. Read the forums. When you’re ready, ask questions on the forums. You’ll be amazed at the quality information you’ll receive on a quality forum, two of which are listed below.

3. Estimate your net worth.

It’s hard to figure out how to get somewhere if you don’t know where you are starting from. Look up your balances and add them up. Add home equity if you’ve got any. Look up your debts and subtract them from the assets.

Anonymous people on some internet forums like to quibble about what to include and exclude in the calculation. What about jewelry? And art? The Beanie Baby collection?!? I like to stick with property, cash, and investments, but whatever you decide to use, be consistent.

I like to usePersonal Capital* to track all of my accounts in one place. The site / app gives you lots of different ways to view and analyze your investments. Mint is lighter on the investment side, but more robust on budgetingand expense tracking if you’re into that kind of thing.

Use the answers to determine a ratio between stocks and bonds for your portfolio. The quizzes are a guide. Some people use simple formula, such as “age in bonds” (70% stocks / 30% bonds for a 30-year old) or a more aggressive version, i.e. “age minus 10” in bonds or “age minus 20” in bonds.

When breaking down your portfolio into two broad categories, the “stocks” allocation includes US and International Stock funds, and alternatives such as REIT. The “bonds” portion includes fixed income vehicles including bonds, CDs, and cash.

I have decided on 90% stocks / 10% bonds for now. You do what works for you.

5. Decide if you want international stock and bond exposure.

The aforementioned John Bogle of Vanguard fame has stated that international funds are not a necessity in the average investor’s portfolio. Interestingly, Vanguard’s target date funds recently increased the international portion of its target date and all-in-one funds to 40% in 2015.

While it is true that many American companies do substantial business overseas, and owning them gives you some international exposure, there are some very large corporations based outside of the United States, particularly in developed markets throughout Europe and Asia.

Recommendations for international allocations range from 0% to 40% or more. I’ve decided to allocate 20% of my portfolio to international stocks, or 25% of my stock allocation.

we enjoy international exposure

6. Decide if you want Real Estate Investment Trust (REIT) exposure.

Ownership in an REIT or a fund of REITs is a way to profit from real estate without the hassles of managing rental property yourself. It’s also a good way to diversify your portfolio. While there is some correlation with the overall stock market, over the long term, it tends to be rather low, at least according to this article from Financial Advisor Magazine.

If buying, renting, and selling actual real estate is part of your “investment” plan, I suppose you should determine how that’s going to work at this point. I’m not going to speak much to that, as it is not my area of expertise, and I consider that to be a form of part-time or full-time work more than an investment. This post is designed to help you create a simple, hands-off DIY investment plan. Landlording is not a part of that plan.

I’ve chosen to allocate 10% of my portfolio to Vanguard’s REIT index (VGSLX), although it has come to my attention about 3.6% of Vanguard’s Total Stock Market Index (VTSAX) and 16.4% of their Small Cap Value Index Fund is in REIT, so my exposure actually exceeds 10%, as evidenced by 13.02% in “alternatives” in the colorful diagram above.

7. Learn about tax-efficiency.

Hooray! you’ve got your very own tailor made asset allocation. Now keep in mind that you will have multiple retirement and non-retirement (taxable / brokerage) accounts. You aren’t going to try to recreate your desired allocation in each account. You will apply the asset allocation across all accounts.

Tax-efficient fund placement describes a manner in which your assets are placed in the accounts which will provide the best (or least deleterious) tax consequence. Tax-inefficient assets that would be taxed the most are sheltered in a tax-deferred or tax-free (Roth) retirement account.

The most tax-efficient funds will be ideal choices for a taxable account. These include municipal bond funds, passive stock index mutual funds, and international stock funds with low turnover (index funds). Including tax managed funds such as municipal bonds in a tax sheltered account can be counterproductive. You are sacrificing yield for a tax benefit that won’t be fully realized.

International funds will generate a foreign tax credit that you can report to the IRS and typically subtract dollar for dollar on your 1040. Growth funds tend to be more tax efficient than value funds, due to lower dividend payments.

8. Explore your work-related retirement savings options.

If you are employed, you likely have access to a 401(k) or a similar account which could be a 403(b) or 401(a). You may also have access to a deferred compensation plan such as a 457(b), or a cash-balance plan.

If you are self-employed, a solo 401(k) is an attractive option. Others exist, such as SEP-IRA, SIMPLE IRA.

A full explanation of each of these options is beyond the scope of this article, but you owe it to yourself to understand what options you as an individual have, and read up on those. Hopefully your book reading in Step 1 gave you some background information. If not, jump to Step 2 and use the internet to your advantage.

Ideally, you’ll have quality,low cost funds available to you (becausefees can cost you millions). Unfortunately, some 401(k) and similar plans have no good options. If you’re trying to choose from a list of crummy funds, WCI has a write-up that can help guide you. If the funds are really bad, and you have no match (as is typical with a 457(b)), you may consider not contributing to the account at all. Always contribute enough to get the match where one exists. Never turn down free money.

9. Decide Roth versus Traditional for your work-related plans.

Some plans will allow you to make traditional (tax deferred) contributions to your 401(k) and similar plans, or Roth (taxed now, not later) contributions, or a combination of the two. If you are unsure, check with your plan administrator or human resources department.

I love Roth money. I love it so much I slashed my net worth by over $200,000 to have more. But if you are earning a physician’s salary, you’re probably better off with traditional contributions, taking a tax deduction now while you are in a high tax bracket. The future is uncertain, but most of us can expect to be in a lower tax bracket in retirement. This is especially true if early retirement is potentially in your future. It’s not unreasonable to plan to live quite comfortably and pay zero federal income tax as an early retiree.

If you plan to work for 30+ years, maxing out all your tax deferred space, you could easily end up with millions. Your impressive balance will ensure that you remain in a high tax bracket starting the year after you turn 70.5 and Required Minimum Distributionsare in place. If this is you, Roth contributions would be a reasonable consideration, despite your lofty current tax bracket.

10. Determine if you have money left over.

One of the best features of accounts like a 401(k) is that you never see or handle the money. It’s invested on your behalf without a pit stop in your checking account. What you do with the other money that comes in the form of a paycheck is up to you. You may be aggressively paying down debt, or saving for a down payment on a home, or a grand vacation.

If your debt payments are made, and your needs are met, and you find yourself with money left over, great! Don’t let it burn a hole in your pocket. Let’s put that money to good use.

congrats! you, like this beer, are halfway through

11. Start a Roth IRA

This Roth contribution is different than the potential Roth contributions we talked about in Step 9. In that case, the alternative was a desirable tax deferred contribution to a retirement account. In this case, we’re assuming you’ve maxed out your retirement accounts, and have money left over. The alternative to this Roth contribution is a contribution to your taxable account (See step 12).

Many physicians will be ineligible for a direct contribution to a Roth IRA. For a single filer, the phase-out begins at a modified adjusted gross income (MAGI) $117,000 and is complete at $132,000. For married joint filers, the numbers are $183,000 and $193,000, respectively.

Do you have the fortunate problem of earning too much? There is good news for you and it’s referred to as a backdoor Roth IRA. It’s a sort of loophole, but it’s a poorly kept secret. The loophole could be closed, so take advantage while you still can.

For a very detailed explanation of how the “backdoor Roth” works, visit Michael Kitces’ instructions here. The “index card” version is this:

Make a $5500 non-deductible after-tax contribution to a traditional IRA account. Repeat in a spousal account if you’ve got one.

On a later date, convert the contribution to Roth.

Be sure to submit Form 8606 with your 1040 to report the after-tax IRA contribution.

The net result is the equivalent of a $5500 Roth IRA contribution (or two), and it can be done at any income level.

Bonus reading: You may have heard of the Mega Backdoor Roth IRA. I looked into it and it’s not an option via my retirement plan. But if your plan allows it, it can be a sweet deal.

12. Start a taxable account.

A taxable account sounds like a bad idea, much like spinal anesthesia, but like spinal anesthesia, it is a good option associated with a scary word.

Also referred to as a brokerage account, or after-tax account, this is simply a collection of investments you buy with money left over after you’ve exhausted your tax-advantaged options.

Although dividends and capital gains in this account can be subject to taxes, there are good ways (keep taxable income low) and bad ways (death) to minimize or completely avoid those taxes. If you are paying taxes on them, they won’t hurt you that badly. I live in a high-tax state and the tax drag on my taxable account in the accumulation phase is approximately 0.5% per year.

If you were paying attention in Step 7, you will fill your taxable account with passive index funds, including international funds if you chose to include them in your portfolio. Municipal bond funds can be a good option too, especially if you can find one that is also tax-free in your state.

13. Create a spreadsheet to track the money in different accounts.

Personal Capital will give you all the balance and allocation information you can ask for, but nothing will be as flexible as a well-designed spreadsheet. A simplified version of the one I use looks like this. It does a great job helping me allocate my desired asset allocation across different accounts in a reasonably tax-efficient manner.

If you’re not an Excel junkie, I’ve built a generic version for you. Enter your email below, and I’ll send you a copy. You’ll be subscribed to receive additional emails from me, but can opt out any time.

Lately, I find myself logging in online to check balances most days, and updating the master spreadsheet every couple of months.

14. Sweat the Details

If you’ve followed the first 13 steps, you’ve probably come across some recommendations in your reading that you’d like to implement in your portfolio. You’ve got a plan that will allow you to be a successful DIY investor, but there is some fine tuning you’d like to enact.

Now is the time to do that. Slice and dice. Implement a small value tilt in your U.S. stocks or an emerging market tilt in international. Plan for futuretax-loss harvesting in your taxable account. Weigh the merits of various fixed income options like CDs, TIPS, I Bonds, and bond index funds. These details aren’t going to make or break you, but you want to have a plan, and this is your opportunity to make it your own.

15. Allocate up to 5% of your portfolio to “play money”

Index investing is boring. You’re not going to hit any home runs or beat the indexes. Of course, you will get market returns, which is better than most active managers do, as Boglehead Larry Swedrroe demonstrates in Swedroe: Active Funds Whiff Again.

These investments may offer a higher reward, but the potential reward is often paired with a side of equal or higher risk. A common recommendation is to limit these investments to 5% of your portfolio. If you have a basket of many individual stocks that is reasonably diversified, you don’t have to count that as part of your play money. Doubling down on biotech is another story. Have fun but don’t bet the microbe farm.

16. Insure yourself

A good investing plan can be thwarted if your assets are not protected from loss.

Don’t spend money insuring things you can afford to replace yourself, like your cell phone and other electronics. Insure against catastrophes, not inconveniences.

a bike lock is all the insurance you need for this bad boy

If you’re completely Financially Independent, you can afford to live without some of these, notably life insurance, and costly disability insurance. Pete Adeney, a.k.a. Mr. Money Mustache has the audacity to forego home insurance. That’s not a bet I’m ready to make, although I have raised my deductible to $10,000 to lower my annual rate.

17. Rebalance at pre-determined intervals

As time goes on, your investments in different asset classes will grow and shrink at different rates. Eventually your tidy 60 / 20 /10 /10 split will look something like a disheveled 58 / 23 / 7 / 12. This is where rebalancing comes into play to right the ship.

1% Yield Bump on Your 1st Investment for Accredited Investors

There are different approaches to rebalancing as outlined in the Bogleheads wiki. Choose one and stick with it. Your options are to rebalance with new additions (or withdrawals in retirement), at set time intervals (quarterly, semi-annually, annually), or when the balance is off by a certain relative or absolute percentage.

The beauty of rebalancing is that it forces you to buy low and sell high. When one asset class has performed well, you will have more of it. You sell some, capturing the gains, and buy more of an underperforming class that is priced low. Rebalancing too often tends to minimize this effect.

You’ve made it through the first 17 steps. If you’ve got a decent income and savings rate, you’re on a path to real wealth. It’s time to think about how to share the wealth (and I’m not talking about taxes this time).

I like to do things optimally, and my charitable giving strategy is no exception. I’ve written about the benefits of utilizing a donor advised fund (DAF), and half of this site’s profits will be donated to charity. I have used several companies’ DAFs, but find Fidelity’s to be my favorite, thanks to low costs and the lowest minimum grant of $50, as compared to Vanguard’s minimum of $500.

When you give to a donor advised fund, you receive an immediate tax deduction when you contribute, and you can donate the money at any time in the future. The tax treatment of your donation can be further optimized by contributing appreciated funds from your taxable account rather than cash. Capital gains will not be incurred by either the giver (you) or the recipient. A win win.

19. Consider your drawdown plan

As you build up your assets, keep in mind you’ll eventually be tapping into them to live a good life in retirement. Knowing which trees to tap and when to tap them can affect your overall harvest. If you’re planning to retire early, and all your assets are in a 401(k), you’re going to have to be a little more creative than your colleague with a sizable taxable account.

Knowing where your money is, how it can be accessed, and what the tax consequences are will allow you to come up with a sensible drawdown strategy to allow for retirement spending.

This Step might scare you off. It shouldn’t. Keep it simple. I’ve written about my IPS a couple times now. It started out simple, and has grown with me as my knowledge base has expanded, and my plan has become more finely honed. University of Chicago professor Harold Pollack wrote his on an index card, and it went viral. The card’s popularity spawned a co-authored 256-page book entitled The index Card: Why Personal Finance Doesn’t Have to Be Complicated. I’ll add this to the list of books I haven’t read, but would love to when I find the time. With a 4.5 star rating on Amazon, it might be good enough to land itself in the list of go-to resources in Step 1.

Harold Pollack’s index card IPS

You’re almost done. Write down 5 to 10 sentences based on the knowledge you’ve gathered so far. Set it aside for now, and revisit annually. Expand it and modify it occasionally as your investing acumen grows and your situation changes.

That’s it! From zero to DIY investing hero in 20 steps. I’m rather proud of this one… please consider leaving it up on the screen in the lounge or share with a friend who could benefit from learning a thing or two.

What did I leave out? Things that are optional or don’t apply to everyone, like college savings and student loan repayment strategies. Asset protection and estate planning are further steps a DIY investor can explore once the basics are covered, but again, are beyond the scope of this 3,700 word post. You wouldn’t want this to go on any longer, would you? OK. Me neither.

*If you choose to sign up for Personal Capital via one of the links on my site, you will be supporting my charitable mission, and it won’t cost you a thing. I started recommending it before I had the ability to receive compensation via an affiliate link, because I use it daily and love it, but I want to provide full disclosure.

If you could add one Step, or one piece of great advice, what would it be?

54 comments

That’s a very good start to finish, step by step list for all beginners! It can get overwhelming to try and do everything all at once si breaking it down into bite size steps can be very helpful! Thanks for the guide!

Could you do a blog post about how to rebalance allocations and keep assets sequestered in their tax efficient locations? For instance, if I keep my 10% allocation of REITs in a tax-advantaged retirement account and my 30% allocation of Large Cap Growth funds in my taxable account (per usual advice) how do I rebalance these assets when the ratios skew? It seems to me, that if the REITs grow to 15%, I will have to sell 5% and then I’ll be left with cash in my tax-advantaged account, but I need to buy assets outside of that account….how? Yes, I know a lot of rebalancing can be done solely with new contributions, but not all of it. And, how about rebalancing when no longer making contributions?

Thanks for the question, Peter. I’ll add it to the list of future posts. The short answer is tax-inefficient assets should be held only in tax-advantaged accounts, but tax-efficient classes can be held in all accounts. I keep US stocks in every “bucket”, allowing me to exchange to and from my REIT and bond allocations. It gets a little trickier the more you slice and dice, and the narrower the bands you try to maintain. I tilt to small and value, but I’m not rigorous in tracking or maintaining the extent of that tilt.

In your case, you could exchange 5% of REIT to an asset class that is now underweight. In the taxable account, when one class becomes overweight, stop contributing to that class, and put future dollars towards an underweight class (perhaps international).

Great Stuff. I could easily see a book in your future that expands on some of the steps and even adds a few like saving for college. I also enjoy reading articles on SeekingAlpha. Keep up the great work. cd :O)

Great reference for the young and aged investor alike. Just caught a minor thing – in section four you have 90% stock allocation but section six you describe your allocation as 80% stock. I am being picky around a very very useful article. ?

My portfolio is 90 /10 overall (stock / bond) where “stock” includes US stock, international stock, and REIT, and “bond” includes bonds, fixed income, and cash.

If you include REIT as “stock”, my portfolio is 90 / 10. REIT funds are often referred to as “alternatives”, but behave more like stocks, so in a 2 class breakdown, I count it as part of the stock portion.

Great read – most people know the ‘what’ they have to do (save money, spend wisely, etc) but they don’t know the ‘how’ to start…or even where to start. They maybe have been reading and know so much on the topic already, but there is a difference between knowledge and action – question – is this the order you would recommend for anyone starting? Educating yourself first I get but would you have the ‘investor policy statement’ and ‘insurance’ be towards the end? Again, great read…

Than you, JonA. I put this guide together as a go-to resource because it’s tough to tell someone how to get started without knowing a lot of detail of where they’re at with knowledge and planning.

I don’t think the order is terribly important, and some people will have already completed at least a handful of these steps, if not most.

It’s tough to write an IPS if you haven’t completed most of the earlier steps, which is why I put it last.

It’s vitally important to be insured; I put it towards the end because it’s somewhat indirectly related to the topic at hand, but your portfolio could be reduced to rubble without appropriate insurance coverage.

Great list. As an aside, do you expect DIY physicians to need to worry about estate planning? I roughly ran through the numbers and even if I work until normal retirement age (I hope I don’t!), I may not reach the net worth that warrant estate planning. Assuming that the cut-off doesn’t get raised and I do end up in the high tax-bracket estate, I expect to be able to draw down on it through charities so my heirs don’t get hit.

This is a phenomenal list! Such great detail – that’s fantastic. I like the idea of having a 5% fun fund. The worst part about “smart” investing is that it’s not exciting. I’ll have to remember to keep a few dollars around for these fun investments. Thanks for the great idea!

Another great post! I used to follow another blogger, Jason Fieber, in his Dividend Mantra blog. You said you max your 401 plan in stocks and bonds. Do you have all in index funds? Why do you have the dividends and capital gains transferred to your bank account, instead of re-investing them? Also, what stock brokers do you recommend? I know there are a few companies who don’t charge (like Robinhood). Thanks for sharing! I understand you may not be able to answer all my questions, but would appreciate a response!

I do re-invest dividends, but in my taxable account, I first send them to a money market fund within the Vanguard account. I then decide which fund to reinvest in. Automatic reinvestments could wreak havoc with tax loss harvesting and create an unintentional wash sale. I don’t buy or trade individual stocks, and the only broker I use is Vanguard, and I do recommend them.

1) Can you please recommend some online survey to make money? 2) is it true that Vangaurd solo 401K does not allow roll over? I am already looking at Fidelity if Vangaurd does not allow roll over. I hope i can make this all happen so that i can contribute to 2016. Thank you

I like bonds in tax deferred, but I’ve read WCI’s arguments. He argues for stocks in Roth, and I do have 100% stocks in Roth, so I guess we’re not that far off in our thinking.

One factor that he doesn’t consider (because it’s unlikely for physicians) is the possibility of being in the 15% federal income tax bracket (0% capital gains bracket) in retirement. That could change the equation drastically. State tax is also not factored in.

I do like his point that the money in a tax deferred account isn’t all yours. If you plan your asset allocation as if all monies are equal, you might have a more aggressive allocation than planned (if bonds in tax deferred) or less aggressive than intended (if tax deferred is 100% stock and bonds are in taxable).

The bottom line is anyone agonizing over the merits of asset location to this level of detail is probably making lots of good choices and will be fine whether they put bonds in tax deferred, munis in taxable, or both.

I haven’t looked at the particular funds you bring up, as I simply buy the Total Bond Fund in my tax deferred accounts.

What are your thoughts about Long-Term Care (LTC) insurance? Are you self-insuring here, or considering this as part of your retirement expenses. Covering this additional expense by 25x (4% rule) with my net worth is likely going to add possibly 2 more years of savings/working and would like to know your thoughts.

If you plan to live on a FIRE budget of about $80,000 as we do, you can probably self insure. If you make it through the first 5 to 10 years without a particularly nasty sequence of returns, you should be golden.

Bogle on Mutual Funds; New Perspectives for the Intelligent Investor by John Bogle. It’s the real deal, not the baby versions you have listed.

The Invisible Bankers by Andrew Tobias

Insurance for Dummies

Better Investing’s Mutual Fund Handbook by Amy Crane. Worksheets for using Morningstar’s MF sheets for comparing mutual funds. Hint: use an index fund appropriate for the types of mutual funds you are comparing. Forms for stock and bond mutual funds. Can be used for money market funds too. Uses Bogle’s eternal triangle of risk, reward, and cost to compare funds.